Benjamin Brink/The OregonianThe city of Portland spent $14.7 million to build the Headwaters Apartments in Southwest Portland's Multnomah Village, aiming to serve middle-income "work force" residents and to generate profits for affordable housing. It hasn't worked out that way.

The city-owned apartments have everything a needy resident could dream of: a location in quaint Multnomah Village, with access to sought-after schools, a good grocery store and a bus line to downtown. Units feature eco-friendly amenities overlooking a restored creek.

But Headwaters wasn't designed for the needy. Most residents, some earning as much as $94,000 a year, can afford to live just about anywhere they want. And that's just the beginning.

Though the city lacks enough housing for its poorest residents, leaders chose to spend $14.7 million in public money to build the 100-unit Headwaters for middle-income "work force" residents.

The complex does not cater exclusively or even mostly to residents making less than 80 percent of the area's median income, despite tapping money reserved for that purpose.

The Headwaters Apartments are exempt from property taxes. That means Multnomah County taxpayers subsidize rents at the complex to the tune of $100,000 in lost revenue a year. Portland officials have fought to keep it that way.

So how did Portland envision a national model for green work-force housing but end up with the high-priced Headwaters? The details -- many of which government officials released begrudgingly -- show how politics, business interests, an influential developer and the city's desire to be at the environmental forefront lined up to shortchange taxpayers and the needy.

"The city should be putting its resources behind the people who most need the help," said Nick Sauvie, executive director of Portland's nonprofit ROSE Community Development, which builds affordable housing. "That's not what the project does."

Rare deal for a city

The Headwaters Apartments are part of a project by developer Jim Winkler that also includes low-income senior housing and private condos. Winkler, a respected affordable-housing developer whose résumé also includes the Adidas America headquarters in North Portland, bought the nearly three-acre site in 1999 for $475,000.

Winkler agreed that Headwaters, with its high-quality touches and environmental work, needed public help to pencil out. "You can do it if you're getting a subsidy," Winkler said. "I think it was a great achievement."

But city leaders knew from the beginning that Headwaters would require expensive rents. An independent analysis by E.D. Hovee & Co., a Vancouver consulting firm, in 2004 noted that Headwaters would be risky because it required charging "significantly higher rents than existing vicinity area properties," putting it more on par with apartments in the central city.

Under the 80 percent guidelines, Headwaters' one- and two-bedroom units are supposed to be affordable to two-person families making $46,100 or three-person families making $51,850. But managers base their rules on 100 percent of the median income. And they chart income by unit, not number of residents; they figure a two-bedroom unit could hold three people, for example. As a result, they allow a lone resident of a two-bedroom unit to make 1 1/2 times the full median income of a three-person household, or $97,200.

That's probably just as well, given the rents. In Southwest Portland, average monthly rents run $684 for a one-bedroom unit and $907 for two bedrooms, according to the Metro Multifamily Housing Association. At Headwaters, tenants pay $930 to $970 for one bedroom and $1,275 to $1,375 for two -- plus $30 to $60 for parking.

"When you look at what we are and what we offer, it's a very fair price," said Dana Earlenbaugh, who works for Guardian Management and oversees the property through a city contract.

Nearly every apartment is full, with Lewis & Clark Law School students, state lawyers, public executives and health care professionals, among others. But fewer than half the units are rented by people earning below 80 percent of the median income, and more than one-third are rented by those making more than 100 percent -- some way more.

"I like the apartments," said physical therapist Zak Benson, who chose Headwaters over more expensive units downtown. "It doesn't have granite countertops. But people come by and say, 'You've got a nice place.'"

"It's not fair"

If not for a property tax exemption, rents at Headwaters would almost certainly be higher.

The Portland Development Commission asked Multnomah County for an exemption in 2005, promising the complex would be rented only to "moderate and middle income households."

The county agreed. But tax inspectors changed their minds four years later when they took a closer look at rents. "Should never have been exempt!" read a comment in the county's property tax computer system.

Multnomah County mailed Portland a property tax bill in 2009 for nearly $103,600. But a year later, the county backed off after Portland threatened to sue, claiming that county officials misled the city by granting tax breaks in the first place.

"As I have said, we do not believe that the Headwaters is exempt under any existing exemption statute," deputy county attorney John Thomas wrote in a June 30, 2010, email to the city's outside lawyer. "However ... we did not believe that we could successfully defend" a lawsuit.

Had the city been forced to pay, tenants could have seen their rents climb an additional $85 a month.

"It's not fair," said Mike Erickson -- who owns and pays property taxes for 24 cheaper "blue-collar" units across the street -- when told about Headwaters' structure. "And the city can do what they want."

Even tenants agree that Headwaters got a cushy deal.

"I think everybody needs to pay their fair share," said Dat Nguyen, a city of Portland employee, after learning the complex is city-owned and exempt from property taxes. "I'd gladly pay a little bit extra for the apartment. I think it's safe and convenient."

Despite the high rents and tax exemption, Headwaters' $1.2 million a year in revenue is barely enough to cover debt and operating expenses. Officials are "conservatively estimating a break-even scenario," according to a 2011 Housing Bureau budget document.

Leaders say little

Public leaders, meanwhile, weren't willing to say much about Headwaters. Officials with both Portland and Multnomah County also created hurdles to The Oregonian's efforts to get records related to the project, including more than $700 to produce public documents.

Portland Commissioner Nick Fish, who has overseen housing for the city since taking office in 2008, declined to be interviewed. "Nick wasn't involved in the development of the Headwaters Apartments, nor the discussions around its tax status," his chief of staff, Betsy Ames, wrote in an email.

Officials at the PDC -- which oversaw city housing projects through June 2010 and manages the Headwaters contract even today -- didn't want to answer questions, either. Nor did officials at the Housing Bureau, which took over housing functions from the PDC.

"Our position is that it is not PDC's role to comment on any past, present or future housing policy questions," Keith Witcosky, the agency's deputy director in charge of communications, wrote in an email.

Daniel Ledezma, a Housing Bureau spokeswoman, wrote in an email: "The Headwaters is the only market rate housing project owned by the City and there are no plans at this time for ownership of a similar property."

"I think that that project is a pretty good experiment to see what works to build housing that the city really needs," Sten said. "The question becomes: How do you subsidize it the least amount possible? And you may have a compelling argument that it should go back on the tax rolls. And if it goes back on the tax rolls, that could be a huge win."